U.K. to Miss Deficit Target as Economy Shrinks 0.5%, Niesr Says

By Gonzalo Vina -
Aug 2, 2012

The British economy will shrink by
0.5 percent this year, forcing Chancellor of the Exchequer
George Osborne to miss his budget-deficit target, said the
National Institute of Economic and Social Research.

The economic deterioration has been “even more
pronounced” than previously forecast as private-sector
retrenchment is made worse by fiscal consolidation and a
“dysfunctional” financial system, the London-based research
group said a quarterly report published today. Osborne will
borrow 12.5 billion pounds ($19.5 billion) more than planned in
the year through March 2013, Niesr said.

“All these factors will be a major drag on economic
performance,” Simon Kirby, an economist at the institute, said
in an interview. “The major problem in the U.K. economy is a
lack of demand and the government can do things to boost
demand.”

Osborne says he will resist the “siren calls” to borrow
more money to underpin the economy, saying investors would turn
on the U.K. in an echo of the pressures experienced by euro-area
countries such as Spain. Standard & Poor’s last week reaffirmed
Britain’s top credit rating despite the economy contracting for
a third straight quarter between April and June.

Niesr had previously forecast no change in output this
year. The institute, which has called for Osborne to loosen the
fiscal stance by up to 2 percent of gross domestic product to
help create up to 200,000 jobs, said the economy will grow by
1.3 percent in 2013, below a previous 2 percent forecast.

Osborne’s 2010 austerity program, which was extended for
two years to 2017 in November, envisaged that the economy would
be growing by 2.8 percent this year. Instead, it is 0.9 percent
smaller than in the third quarter of 2010, shortly after Prime
Minister David Cameron’s Conservative-led coalition took office.

Tax Shortfall

A shortfall in tax revenue caused by the recession has led
many economists to doubt that Osborne can meet his goal of
cutting the deficit to 120 billion pounds this fiscal year.

Cameron’s assertion that Europe’s debt turmoil is largely
to blame for the economic malaise has been called into question
by some economists and the opposition Labour Party, which argues
the government is trying to cut the deficit too quickly.

Kirby said a slump in consumer spending, reflected in lower
imports, will hurt the economy this year, while weaker exports
to the U.S. and the euro area will act as a drag in 2013.

Niesr published research carried out with the London School
of Economics and Political Science that estimates output would
be 239 billion pounds higher by 2021 if Osborne’s austerity plan
had been delayed by three years.

“We would be seeing a small amount of growth rather
contraction,” said Kirby.

Niesr said the government needs to do more to fix the
financial system and, while it welcomed initiatives like the
Funding for Lending program that began this week, a piecemeal
approach would not be enough to return credit conditions to
normal.

The Bank of England yesterday maintained its bond-buying
program at 375 billion pounds as policy makers wait to assess
the outlook for the latest stimulus and their new lending
program.